Day: December 21, 2016

The worst investor fraud since Bernie Madoff appears to be upon us. Yesterday, managers at the New York based hedge fund Platinum Partners have been arrested as federal prosecutors allege the occurrence of a $1 billion fraud. Mark Nordlicht and has partners spent the last decade giving their investors nearly 20% annual returns, with those returns being fueled through return of other investors’ capital in response to withdrawal requests rather than actual investment returns.

Although the Platinum Partners clients may be able to receive some recovery through a combination of SIPC, insurance, and the distribution of remaining assets, this remains a worst-case nightmare for those who entrusted a meaningful portion of their accumulated savings to the stewardship of the Platinum Management team.

If you have a strong balance sheet, and you aren’t shipping out most of your profits to shareholders, you can withstand an extended period of challenging business conditions and still create shareholder value.

Even though keeping adequate cash reserves and running a business with a hyper-focus on prudence remains out of fashion, the value of financial strength occasionally reveals itself.

It comes to my mind every time I take a look at Bed Bath & Beyond (BBBY) stock. For the past ten years, the company has become yet another victim of Amazon as customers learned that they kind find the exact same home furnishings at a cheaper price than they’d get if they visited a physical Bed Bath & Beyond retail location.

I have written before about the excellence of The Vanguard Wellington Fund (VWELX) which has delivered returns of 8.3% annually since 1929. When you consider that the imperative of the fund is extreme safety and quality, those returns are quite impressive because of the all-weather nature of the fund. It is a balanced fund, which commits Vanguard to putting 30-60% of its assets in government and high-grade corporate bonds and the rest in low-risk blue-chip stocks.

My view is that it is an ideal holding for those who want to preserve wealth, get a little bit spooked by volatility and/or possess general ignorance of stock-specific investing, and prize stability for their accumulated savings. It is not intended for venturesome accounts or people that want to be rich by age 40 investing a few thousand here and there, but it is intended for people that want to protect what they got and while keeping their present purchasing power intact.

As much as some people wish it were so, a share of stock does not get enthralled with gratitude on the day that you deigned to buy it and then accelerate towards the sky in value as a show of appreciation.

Of course, we all know that building any collection of assets will, by definition, include an investment that is the worst performer. If you own 35 stocks, it is axiomatic to note that one of your holdings will be ranked 35th out of 35 in terms of overall performance.

My preference is that, given all stocks carry the possibility of fluctuating from x to 0.8x or even 0.6x, I would like to get paid in exchange for absorbing that volatility during my holding period. This is where dividends can really accelerate the future of your returns, permitting you to enjoy what John Neff called “hors d’oeuvres while waiting for the main meal to arrive.” For those of you that hold investments in Gilead Sciences, IBM, BP, Diageo, or GlaxoSmithKline, it is good to keep in mind the role that dividends play in creating a reward for your patience.

When large corporations report earnings, it becomes a popular parlor game to try and guess whether the business of choice grew faster or slower than Wall Street analysts expected during the previous quarter. It offers an occasion for stocks to rise and fall by 3-8% in a single day and that is usually the short-term threshold that catches the attention of investors.

What, then, do I consider to be the ideal position of strength during earnings season?

I think the ultimate objective is to already own a stock that is reasonably valued going into earnings season with liquid cash available to act upon the possibility of opportunity.

Disclaimer

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